Bar-room brawl at M&B turns nastier

Mitchells & Butlers' investors have been trading the sort of insults that would get them ejected from many of the company's pubs – and the row is about to come to a head

Binge drinking and punters fighting in the streets have become mainstream news in recent years. But in the business press, a highly public spat has also been going on for the past two months between major shareholders and board directors of Mitchells & Butlers – the leisure giant which owns the All Bar One, O'Neill's and Harvester brands and a host of other pub chains, as well as the Toby Carvery and Brown's restaurant groups, among others.

The war of words will come to a head tomorrow at what promises to be a stormy annual general meeting in Birmingham, when shareholders will vote on a series of resolutions that could help to shape the company's future over the coming years.

At the heart of the dispute is a battle for influence over the strategy of the group between so-called activist shareholders and the M&B board, led by its current chairman Simon Laffin, a former director of the grocer Safeway and Northern Rock bank.

Spice has been added to the verbal brawl by the fact that the board is up against Joe Lewis, the biggest M&B shareholder, whose investment vehicle Piedmont has a 22.8 per cent stake, and the Irish racing tycoons JP McManus and John Magnier, who own 17.5 per cent of M&B through their investment vehicle, Elpida.

While M&B is understood to have had concerns about Piedmont's influence early last year, the power struggle at the company was catapulted into the public domain at the end of November, when M&B issued a statement to the Stock Exchange which appeared to accuse Mr Lewis and Elpida of acting in concert to take over the company, which Piedmont has vehemently denied. It also claimed Piedmont had stymied its attempt to appoint a new chairman by vetoing prospective candidates, and had pushed for the resignation of the senior non-executive director, Simon Laffin. Within hours of the statement, M&B ousted four non-executive directors from its board, including Piedmont's two representatives, Richard McGuire and Doug McMahon, and pointedly named Mr Laffin as chairman.

Yesterday, Mr Laffin said: "Piedmont was frustrating our appointment of an independent chairman and a new non-executive. They also wanted me to get rid of me as senior independent director. It was becoming very difficult for the board to operate, even refusing to sign off the accounts the evening before the results."

However, the Takeover Panel ruled this month that "no breach" had occurred, although M&B asked the panel to keep investigating.

While Piedmont has vehemently denied any wrongdoing, it has also been willing to publicly air its grievances about the way M&B has been run. These include querying a huge increase in the pension of M&B's former chief executive Tim Clarke, whose pot has increased from £3.7m in 2007 to £8m, according to its most recent annual report. They have also questioned why the pubs group has presided over a £50m slump in pre-tax profits to £134m over the last five years when its revenues have jumped by £400m to £1.96bn in 2009.

Paul Hickman, the analyst at KBC Peel Hunt, says: "It is not a very edifying spectacle, but you cannot say how this will affect the company operationally."

For many of M&B's private shareholders, however, this is merely the latest unsightly scene of major investors washing their dirty laundry in public.

In the years before Mr Laffin joined in January 2009, M&B faced a power struggle with Robert Tchenguiz, the Iranian business tycoon, who pushed for it to split its operations and property into two separate businesses. While the opco-propco deal was not done, the swap facility that M&B put in place to hedge against interest rates and inflation on the debt led to total losses of nearly £500m. In fact, Mr Lewis snapped up the 23 per cent stake from Mr Tchenguiz, when he was forced to offload it during the Icelandic banking crisis.

For investors, the other frustrating aspect of the dispute is that it comes at a time when M&B – at least in terms of underlying sales – has shown itself to be one of the leisure sector's best performers during the recession.

At tomorrow's AGM, one of the key votes will be the re-election of Mr Laffin to the board. The chairman needs to receive a majority, but given the scale of the Piedmont and Elpida vote, he could be booted off the board. However, the votes of the company's 60,000 private shareholders, and whether they back the current chairman, will also be closely watched. Last week, the Association of British Insurers issued a "red top" alert about the corporate governance issues at M&B, and the board is thought to have been pleased with the support it received from the organisation.

But Piedmont is understood to be confident of securing a 50 per cent vote against Mr Laffin's re-election, given the support of Elpida and other groups. Yesterday, Mr McGuire did little to hide his frustration with Mr Laffin, saying: "As chairman, he has clearly made it a lot of about him and not the business."

Piedmont supports the election of John Lovering, the former chairman of Debenhams, as Mr Laffin's replacement if Mr Lovering is elected to the board tomorrow. M&B said earlier this month it had "reluctantly" agreed to such a compromise. However, Piedmont has said it will not support the re-election of Mr Laffin and Tony Bates, a non-executive director. It is calling for the election of Jeremy Blood, the former managing director of Scottish & Newcastle, Mike Balfour, the founder of Fitness First, Simon Burke, chairman of Majestic Wine, and Mr Lovering. But the M&B board supports only the latter two, in order to have parity on the top table. Mr McGuire explained: "We need a decisive, strong and stable board."

While Mr Lewis is thought to be disgruntled with M&B's profit performance, the board is largely in the dark about Piedmont's strategy. Among City analysts, a source of frustration is the lack of communication between board directors and its biggest shareholders. Wayne Brown, an analyst at Altium Securities, said: "We are rather surprised they have not been in open dialogue discussing strategy, and that the board of M&B does not know the strategy of Piedmont and what they are after."

What is not in doubt is that, in sales terms at least, M&B is performing strongly at a time when record numbers of pubs are closing. In the 14 weeks to 2 January, its like-for-like sales growth was 3.3 per cent. Part of M&B's strategy in the recession has been to focus on growing food sales, which it has done well since the smoking ban came into effect in 2007.

Yesterday, Mr Laffin said: "There is a long-term growth opportunity for the business and we believe we can turn the extra market share into profit growth, particularly as we continue to refine our customer offer and take costs out. We already achieve one of the best sales and profit-per-pub performances in the sector."

But Mr Hickman has raised concerns that M&B, which has debts of £2.6bn, has not been able to participate in the property grab that rivals Wetherspoon, Marston's and Greene King have been carrying out, given its financial constraints, although he agrees it has outperformed the market in the downturn. For investors, however, the big issue the AGM will be to see an end to its directors and shareholders washing their dirty laundry in public, and returning to the real business of growing profits from pints and pub grub.

Battling in the boardroom: The key players

Simon Laffin

No one could ever accuse the chairman of Mitchells & Butlers, Simon Laffin, of ducking a challenge. He was the chief financial officer of Safeway when it was taken over in 2004 by its grocery rival Morrisons. The latter was viewed in retail circles as being a troubled acquisition until it came good years later. Mr Laffin remains an industrial adviser to the private equity giant CVC and was involved in its aborted takeover approach for Sainsbury's in 2007. He was thought to have seen substantial value in the Sainsbury's brand and admires the work done by the group's chief executive, Justin King. Mr Laffin's most high-profile role was at Northern Rock, which he joined after it suffered severe liquidity problems, including a run on the bank. He stepped down in December 2008. The 50-year-old became chairman of M&B in November 2009 but faces a close call in terms of his re-election to the board tomorrow.

JP McManus and John Magnier

The Irish tycoons are well known in sporting circles and are considered two of the most influential people in horse-racing and breeding worldwide.

In addition, Mr Magnier is married to Susan, the daughter of Vincent O'Brien, the Irish racehorse trainer. Both are also keen fans of Manchester United and good friends of its current manager, Sir Alex Ferguson. Mr Magnier sold his 29.5 per cent stake in the football club in May 2005 to the US businessman Malcolm Glazer, who also owns the NFL football team the Tampa Bay Buccaneers. Mr McManus and Mr Magnier go back a long way as business associates of Joe Lewis.

Mr Magnier is reported to have left school at the age of 15 to take charge of his family's estate in Fermoy, Co Cork.

His personal wealth is said to be about £800m, although this is thought to be a conservative estimate.

Joe Lewis

Joe Lewis is known to value his privacy and has not relished the public spat with the board at Mitchells & Butlers. Now 72, he was born in the East End of London and left school at 15 to work in his father's café. He eventually built the business into a group of restaurants aimed at tourists, which included the Beefeater chain. He sold up for £30m in 1979 and decamped to the Bahamas, where he still lives. Since then, Mr Lewis has made an even larger fortune as a currency speculator, although he lost a huge sum when the investment bank Bear Stearns collapsed in 2008 after a $400m gamble on a correction in the market bombed.

Mr Lewis – worth £2.5bn according to the most recent Sunday Times Rich List – bought his stake in M&B in October 2008. He is a keen golfer, counts Tiger Woods as a friend and owns a 600-acre golf estate in Florida. He reportedly once paid $1.4m to play a charity round with Woods.